OUTLOOK OF

INDIAN
ECONOMY
INTRODUCTION TO
ECONOMICS
& ORGANISING IT
ECONOMICS-THE DISCIPLINE

 Economics is the study how societies use scarce resources to produce valuable commodities
and distribute them among different people. Economics, THM, 2005.

 Economics studies how individuals, firms, government and other organisations within our
society make choices and how these choices determine the use of its resources. Economics,
N&C, 2006.

 The Branch of knowledge, which concerns with production, consumption, and transfer of
wealth.
ECONOMIC ACTIVITIES

The activities which involve

 profit, loss,
 livelihood,
 occupation,
 wage,
 employment, etc.,
are economic activities. Economics studies all these activities.
ECONOMICS AND THE ECONOMY

Economy is economics at play in a certain region.

Improving living conditions of the humanity at large has been the real and
the ultimate goal of the discipline.
CHALLENGES OF THE ECONOMY

 The main challenge of any economy is to fulfil the

needs of its population.
 As an economy achieves success in supplying one set of goods and services
to its population, the population starts demanding another set of goods
and services which are of a higher order.
DISTRIBUTION NETWORK MODELS

 State Mode of Distribution

 Government takes the sole responsibility
 Ex: Former Soviet Union and Communist China-pre 1985
 Market Mode of Distribution
 Functions on the basis of Price Mechanism
 Ex: Euro-America till 1930
 State-market Mix Mode of Distribution
 Certain necessary goods & services either free or on subsidised rates
 Ex: Almost all economies of World Today, ex India,
ORGANISING AN ECONOMY

 Any one issue which has affected civilised history of mankind the most and has been a
contentious issue is the way the production process in an economy should be organised.

 Capitalistic Economy
 Inspired from Adam Smith-Wealth of the Nations(1776)
 ‘Invisible Hand’ of ‘market forces’(price mechanism) will bring the state of equilibrium
Ex: USA just after Independence
ORGANISING AN ECONOMY continued…

 State Economy
 Inspired by books of German philosopher Karl Marx
 USSR after 1917 and ideal shape in Republic of China(1949)
 The decisions related to production, supply and prices were all suggested to be taken by the state
only

 Mixed Economy
 After Great Depression 1929, Inspired from: The General Theory of Employment, Interest and
Money(1936) By: John Maynard Keynes.
 he suggested an increase in government expenditures, discretionary fiscal policy (fiscal deficit,
lower interest rates, cheap money supply, etc.).
Role of State in an Economy

 As a Regulator of Economic System.

 As a producer and/or supplier of private goods and services.
 As a producer and/or supplier of public goods or social goods.
Washington Consensus

 The term ‘Washington Consensus’ was coined by the US economist John

Williamson (in 1989)
 He had suggested a set of policy reforms which most of the official in Washington
(i.e. International Monetary Fund and World Bank). The policy reforms included
ten propositions:

(i) Fiscal discipline

(ii) A redirection of public expenditure priorities toward fields offering both high
economic returns and the potential to improve income distribution, such as primary
health care, primary education, and infrastructure.
(iii) Tax reform (to lower marginal rates and broaden the tax base)
(iv) Interest rate liberalisation
(v) A competitive exchange rate
(vi) Trade liberalisation
(vii) Liberalisation of FDI inflows
(viii) Privatisation
(ix) Deregulation (in the sense of abolishing
barriers to entry and exit)
(x) Secure property rights

Reasons why Washington consensus was

controversial:

 The term got used synonymous to neo-liberalism, market fundamentalism,

globalization. It has often been used to describe an extreme and dogmatic
commitment to the belief that markets can handle everything.
 The policies seemed to have been imposed by International Monetary Fund and
World bank.
 These kinds of policies actually increase poverty as Foreign direct investment is
encouraged which will pay less wages and local environment is destroyed.
 Sectors of an economy
Every economy tries to maximize the returns of economic activities in which it is
involved.

1. Primary sector:

• This sector includes all those economic activities where there is the direct use
of natural resources as agriculture, forestry, fishing, fuels, metals, minerals,
etc.
• Broadly, such economies term their agricultural sector as the primary sector.
This is the case in India

2. Secondary sector:

• This sector is rightly called the manufacturing sector which uses the produce
of the primary sector as its raw materials.
• Since manufacturing is done by the industries, this sector is also called the
industrial sector— bread and biscuits, cakes, automobiles, textiles, etc.
3. Tertiary sector

 This sector includes all those economic activities where different ‘services’ are
produced such as education, banking, insurance, transportation, tourism, etc.
 This sector is also known as the services sector.

Types of Economies

1. Agrarian Economy

 An economy is called agrarian if the share of its primary sector is 50 per cent or
more in the total output of the economy.
 India was an Agrarian economy at the time of Independence, but now it shows the
typical symptom of a service economy.
 The primary sector’s contribution is falling to almost 18 per cent of its
total produce, while almost 60 per cent of their population depends on
the primary sector for its livelihood.
 Thus, in monetary terms India is no more an agrarian economy, the
dependency ratio makes it so—
2. Industrial Economy:

 If the secondary sector contributes 50 per cent or more to the total produce value of an
economy, it is an industrial economy.
 Higher the contribution, higher is the level of industrialization.

3. Service Economy:

 An economy whose 50 per cent or more produce value comes from the tertiary sector is
known as the service economy.
 The tertiary sector provides livelihood to the largest number of people in such
economies.
 The Second World War had established the fact that industrial activities were a faster
way to earn income in comparison to agrarian activities— and almost every country
started their preparation for the process of industrialization.
 Country after country successfully industrialized and a pattern of population shift
occurred from one to another sector of the economy, which was known as the stages of
growth of an economy.
 India was one of those countries.
Idea Of National Income
&
Economic Growth

Presented By Abhishek Kumar

GDP (Gross Domestic Production)

Presented By Abhishek Kumar

 Percentage
increase in Net
Domestic
Product (NDP) at
Constant and
Current Prices of
Indi

Community data.gov.in (Government of India)

Presented By Abhishek Kumar

Gross National Product (GNP)
Presented By Abhishek Kumar
Net National Product
Presented By Abhishek Kumar
 Cost and Price of National Income

Taxes

Subsidies

Presented By Abhishek Kumar

Revision of the base year

Uniqueness of Indian Economy

Presented By Abhishek Kumar

ECONOMIC GROWTH AND ECONOMIC
DEVELOPMENT
 Economic growth means increase in output or production.
 Economic development means both more output or
production and changes in the technical and institutional
arrangements by which factors of production are produced
and distributed.
ECONOMIC DEVELOPMENT

Economic growth and economic development are often used

interchangeably. However, there are distinctions between two
concepts.

Low Low Level of

Economic Education &
Growth Health Care

Low Level of
Low
Low Income Human
Investment
Capital

Low
Low Saving
Productivity
DEVELOPMENT
Example:

Development

Growth
ECONOMIC DEVELOPMENT

 Higher economic development requires higher economic

growth. But does not mean that a higher economic growth
automatically brings in higher economic development. Thus
we have many diverse cases of growth and development:

1. Higher growth and higher development.

2. Higher growth but lower development.
3. Lower growth but higher development.
MEASURING DEVELOPMENT
 International bodies such as the UNO, IMF, and WB were concerned about the
development of the comparatively underdeveloped regions of the world for
which measurement of development is required. The Idea of developing a
formula was basically facing two kinds of difficulties:

I. Level 1 is Development Factors

II. Level 2 is difficulty in quantifying a concept as development constitutes
qualitative aspects.
SOLUTION IN MEASURING DEVELOPMENT
In the year 1990 the United Nations Development Programme in its first Human
Development Report introduced the concept of Human Development Index.
MEASURING DEVELOPMENT

 Human Development Index could be considered as one possible way of

measuring development but, as per the experts, such other determinants
affecting our living conditions might be:

I. Cultural aspects of economy

II. Outlook towards aesthetic and purity of environment
III. Aspects related to the rule and administration in the economy
IV. Ethical dimension of human life
V. People’s idea of happiness and prestige.
 Happiness and
Behavioral Economics

Presented By Akash
Definition of Happiness

 Happiness can be described in two ways:

- As an Emotion
- As a sense of life satisfaction

 According to WHR 2017, published by UN, Norway is the happiest

country in the world.

Presented By Akash
What is GNH(Gross National Happiness)

 It emphasizes that country's progress is not only dependent on economic

development but also on non-economic factors of well being.
 It has following parameters to attain happiness:
- Higher per Capita Income
- Good Governance
- Environmental Protection
- Cultural Promotion

Presented By Akash
Pioneer of Gross National Happiness

Presented By Akash
Behavioural Economics

 Method of economic analysis that applies psychological insights into human

behavior to explain economic decision-making.

 Altruism and Trustworthiness

Presented By Akash
Values and Economics

 Few good human beings can make an overall better society

 Honesty and Integrity can act as cement for self-interest driven economic
growth.

 Good news is that people have started to believe that these values can be
developed and nurtured.

Presented By Akash
State of Indian economy at the time of
independence
• Indian economy was mostly agrarian with more than 50% of GDP
coming from agriculture. It was a stagnant economy (0.5% p a growth
between 1860 -1945) characterized by widespread poverty.
• Agriculture:
• More than 70% of labor force was employed in agriculture. India
was exporting tea, coffee, sugarcane, spices, oilseeds to Britain.
• Productivity in Agriculture was amongst the lowest in the world.
• Industry
• Industrial revolution has destroyed the Indian handicraft industry
• Only 6.6% of national income came from manufacturing and it
employed on 1.8% (2.2 million) of working population.
State of Indian economy at the time of independence
Prime Moving Force.
• Govt. opted for industry as PMF for the economy
• It was an illogical decision as-
• No presence of infrastructure sector viz.Power/Coal/Cement Ind
• Lack of investible capital.
• Absence of technology, skilled manpower & market for industries.
• Other social psychological factors.
• Agriculture could have been the obvious choice since-
• Fertile land which was fit for cultivation.
• Human Capital didn't require high skills of training.
• Economy would have achieved food security.
• Major policy shift announced in 2002-Agriculuture was
announced as PMF
Major Policies by Govt.

• New Agriculture policy 2000

• Profit maximization for agricultural activities.
• National Agricultural Insurance Scheme.
• Insurance to all agri activities
• EXIM Policy.
• Policy initiatives to increase export of agri commodities
• Second Green Revolution
• Agricultural sustainable growth
• Bharat Nirman
• Agri & Rural Infrastruture.
 Planned & Mixed Economy

• Mass poverty, regional disparity over natural resources and socio-

economic conditions were major factors for opting planned
economy.
• Contemporary experiences of development model-
• Great depression of 1929, hence govt. intervention was
necessary.
• Soviet Union & some European nations had faster economic
growth.
• Dominant role of govt. to neutralize market failure situations.
• Idea was to mobilize resources to realize prioritized objective with
in the time frame.
Emphasis on Public Sector

• Infrastructural Needs-
• Focus on Power, Transportation & Communications to drive
economy expansion.
• Pvt. sectors were kept out since there no market for such
infrastructure.
• Masses lacked the market linked purchasing power capacity.
• No alternatives, hence govt still has the monopoly in infra
sectors viz.power,railways,aviations,telecommunications.
• Industrial Needs
• Industry was the PMF for economy.
• Requirement of core industries viz.Steel,Cement,Coal,Crude
Oil,Oil refining & Electricity to enable manufacturing.
The results of mixed economy
• The mixed economy resulted in the worst features of socialism
and capitalism
• Controls of socialism
• Monopolies and lobbies of capitalism
• It did not deliver social justice and welfare
• Quality education and public health did not reach the poor
masses.
• Subsidies got delivered -mostly to the well off.
• India learnt by this experiment that State does not necessarily
work on behalf of people –it works on behalf of itself –the
politicians, bureaucrats and the special interest groups that
support them.
• We squandered the first 40 years in this experiment when the
Asian economies were rising
Employment & Development of Social Sector

• PSU’s were taught to create jobs to alleviate poverty.

• Reservation in Jobs were considered as a tool of social change.
• PSU was called focus of ‘Trickle down affect’.
• Over-employment of labors at PSU’s had financial repercussions.
• PSU’s also viewed as revenue generators for social sectors viz.
education, healthcare, drinking water, nutrition etc.
• PSU’s started running into losses & often required budgetary
support from govt.
 Rise Of Pvt Sector & Summer of 91’
• On June 21st 1991, Narsimha Rao was sworn in as PM
• On June 22nd, he announced to the nation that there was a crisis and
his govt. Intended to “sweep the cobwebs of past and usher in
changes”
• Rao called a meeting of opposition leaders where Manmohan Singh
explained to them that India's forex reserves were down to two
weeks of imports –that part of our gold reserves have been flown to
London as collateral for the $2.2 billion loan from IMF –Obligatory
Reform was only option left.
• Manmohan Singh devalued rupee by 20% in two steps in July first
week.
• He gave 24 hours notice to Chidambaram, the commerce minister, to
come with proposals to abolish import export controls
Summer of 91’
• Rao had kept the industry portfolio with himself and he got a
reformer AN Varma to be his principal secretary
• Together with AN Verma, Manmohan Singh and Chidambaram,
instead of opening up some industries from ‘License Raj’, they
created a small negative list of industries that needed license.
• On July 24th this new industrial policy was announced and the
decades old License raj was history.
• Implementation of these reforms were headed by Verma who
ran a review every Thursday for two years and reported to
cabinet weekly and the Govt announced newer steps to reform
every week.
• Import tariffs were reduced from a max of 300% to a max of
150% in the 1991-92 budget announced on 24th July 1991.
The key officials behind the implementation of
1991 Reforms

A N VERMA Montek Singh

Naresh Chandra
Principal Secy Secy, Dept of
Cabinet Secy
economic affairs
Effects of liberalization

• Within 2 years –Forex reserves shot up from $1 billion to $20 billion. (

it is almost $375.7 B now)
• Inflation came down from 13% in 1991 to 6% 1993
• Fiscal deficit came down from 8.4% of GDP in 1991 to 5.7% of GDP in
1993 ( it is still around 3.51%)
• Companies expanded capacity in virtually all industries – Banking,
Airlines, power, petroleum, cellular phones etc expanded
• Foreign investment rose from $150 million in 1991 to $ 3 billion in
1997(FDI in India in 2009 was $34.6 B and in 2016-17 was $60 B)
What was left undone?

• India’s labor laws are un touched – these laws enacted since

1947 makes it very difficult to hire and fire labor in India –it
protects existing workers – but have kept new workers out of job
(93% of working-age Indians, estimated now at 500 million,
continue to work informally—outside of the organized sector and
without proper labour contracts)
• Banking reforms
• India has still not opened up Agriculture sector and is subsidising
this sector very heavily.
• Tax Reform-GST already implemented.
• Infrastructure,Eductaion,Healthcare.